Global markets are experiencing significant volatility as oil prices surge due to a prolonged disruption of flows through the Strait of Hormuz, with approximately 8 million barrels per day of crude oil production shut in, according to the International Energy Agency [4]. ING’s analysis indicates that limited spare capacity, a slow US supply response, and constrained alternatives are likely to keep oil prices elevated, with energy flows expected to remain at a near standstill until the end of May and only gradually recovering between June and August [4]. This supply shock is causing oil prices to spike to record highs, with prices expected to remain elevated to balance the market through demand destruction [4].
The Canadian Dollar (CAD) has drawn support from a softer US Dollar (USD), while the USD/CAD pair slipped to around 1.3659 after a three-day winning streak, pausing at two-week highs [1]. Canadian inflation data showed headline CPI rising 0.5% MoM in February, below expectations of 0.6%, and the annual rate slowing to 1.8% YoY from 2.3% [1]. The Bank of Canada’s (BoC) core CPI increased 0.4% MoM, but the annual core measure eased to 2.3% YoY from 2.6% [1]. These figures reinforce expectations that the BoC will maintain a steady policy stance, with a Reuters poll indicating 25 of 33 economists expect the central bank to keep rates unchanged at least through 2026 [1]. However, last week’s disappointing employment data could prompt a reassessment if labor market weakness persists [1].
BNY’s Head of Markets Macro Strategy, Bob Savage, notes a notable break in traditional correlations between the Dollar, oil, and equities as investors respond to the Iran conflict and upcoming central bank meetings [2]. The oil/gold ratio, which peaked at 86 barrels of oil to 1 oz of gold and is now below 50, has become a key barometer for the USD as leverage unwinds [2]. Investors appear to be positioning for a bottom into quarter-end, awaiting clarity on the duration of the conflict and central bank policy direction [2].
MUFG analysts maintain a short EUR/USD stance, arguing that the Euro faces a larger negative terms-of-trade shock from higher oil and natural gas prices [3]. Their regression analysis suggests that for every 10% gain in crude oil, EUR/USD drops 0.7%, with the recent 3.0%-3.5% decline in EUR/USD consistent with a 50% rise in crude [3]. Scenario analysis projects EUR/USD in the 1.16–1.18 range if Brent crude remains at USD 75-85 per barrel, 1.1200-1.1600 if crude rises to USD 110, and as low as 1.0700 if oil and gas prices double [3]. The analysts note that even a hawkish ECB is unlikely to prevent further EUR weakness given the scale of the energy shock [3].
Markets are also reassessing the Federal Reserve’s policy outlook, with traders scaling back expectations for rate cuts this year. The Fed is widely expected to keep interest rates unchanged in the 3.25%-3.50% range at its upcoming meeting, with investors closely watching Chair Jerome Powell’s forward guidance and the updated Summary of Economic Projections [1].
CONCLUSION
The ongoing disruption in oil supply through the Strait of Hormuz is driving record-high oil prices and causing significant shifts in currency and equity correlations. Central banks, including the Bank of Canada and the Federal Reserve, are expected to maintain steady policy stances amid heightened uncertainty, while the Euro remains vulnerable to further declines due to the energy shock. Market sentiment remains cautious as investors await further clarity on geopolitical developments and central bank guidance.